Simply too complicated… that was what a blind 95-year-old investor, who was also hard of hearing and not financially literate, remarked when he was made to sign a document declaring he was an experienced investor. Sadly, he lost his holding in La Valette Property fund. Many others did not understand the volatility of their investment (which we know has collapsed). It is no secret that Bank of Valletta (BOV), acting as custodian of the botched fund, issued clean custodian certificates for three years in succession. The saga of the failed fund is not new to readers but for sake of exactness I am reproducing some comments and information garnered from the media.
It all started when promoters of the fund, particularly at branches of Bank of Valletta, earned cool commissions selling the vehicle as a low risk property fund, which we now know has lost €50 million. The original fund sparkled off at a handsome sum of €84 million but as we shall see later on dropped in value to €30 million. Its brochure described it as a multi-manager property fund, which as the name implies has all the fortitude of a diversified and well-managed vehicle. This vehicle was managed by Valletta Fund Management, itself owned jointly by BOV and Insight. It all started to go wrong when Insight as the managers decided to place a sizeable chunk of the invested monies in Belgravia European Property fund that turned out to be the bad apple in the barrel. In their defence, Bank of Valletta and Valletta Fund Management said that they had kept fund holders fully informed on the performance of the Property Fund .The fund hosted 13 sub funds with a total of 22,000 shareholders out of which it was only the La Valette Multi-Manager property funds that was under stress. As a conciliatory note to shareholders the bank said that one swallow does not a summer make. Yet not all apples turned rotten as other funds were safe given that the legal structure of a Sicav ring fences the separate funds or cells. This plea did not hold water with most of the fund holders such that a good number filed judicial protests.
One of these protests was by Finco Trust, which alleges that BOV had not been transparent with shareholders as it failed to disclose the fact that the Belgravia fund’s directors were being criminally investigated for fraud by the Jersey police, and that its shares had been suspended by the Jersey Financial Services Commission.(JFSC). It alleges that since the Sicav was owned by BOV through its subsidiary Valletta Fund Management, the bank could not offer independent guardianship of the fund as required by law. Unfortunately things went sour. In September 2008 a press release issued by the JFSC stated that Belgravia Fund Managers had suspended all redemptions in the fund. Furthermore, the Commission was concerned that each of the suspended Funds were without adequate or effective management or financial or accounting controls in place. It was plain to see that the true and correct value of the investments or other assets of such funds could not reasonably and reliably be ascertained. Having said all this, the bank through its hierarchy has put on record its sympathy with the fund holders. It was forthright in publicly expressing its sincere regret on the poor performance of the Fund, saying that it never failed to do its level best to secure the best possible outcome in the circumstances concerned. The bank urged all concerned to await the outcome of the MFSA investigation into this matter – an investigation to which the bank did extend its fullest co-operation. But the proof of the pudding is in the eating and consumers complain that the stuff is not edible.
In the protests, the consumers said the nine underlying funds were inappropriate vehicles for their investment. They speak plainly of alleged mismanagement. Can you blame them and brush them off as sore losers? Or shall we hope that the much-awaited MFSA investigative report will throw some light on the puzzle and led to justice to be done. In this context, Prof. Banister chairman MFSA has been interviewed by the media on the issue. He would not comment on the actual findings, saying BOV and VFM had to first reply to its report and then the authority would decide “what action, if any, it should take”. He added: “We will take all the necessary action, if any, as the law permits. We could suggest the bank takes remedial measures appropriate to the findings. The law allows us to impose a fine – up to a maximum amount of just under €100,000 – and we have imposed fines in the past. This fine is certainly small beer for those pensioners/consumers who lost collectively €50 million in a term of four years.”
Is it futile to yearn for some form of compensation one may ask? Professor Banister replied: “We have to look at that specifically because we have never done it in the past. We can request or recommend but whether we have a legal right to order the bank to award compensation is something we have to look into very carefully. One obviously does not want to replace the courts.” That is fair enough considering the fact that investors have as yet instituted no legal case. This is all correct but if you burnt your fingers on your life savings then you cannot be blamed for taking a more belligerent view. Typically, we read in the Times of Malta how economist Karm Farrugia criticised the choice of Insight Management by BOV. The former decided to invest a larger proportion of the funds in the disgraced Belgravia pot. He brands the bank officials as not being smart enough to smell a rat. In his words they failed for not “recognising fraudsters like Belgravia”. But in his sober admission, even though he lost half of a botched investment, he declared that short of any conclusive proof that redemptions from the fund back in 2008 took place by ‘privileged shareholders’, he would not entertain any suspicion in the bank’s directors. Can you blame Finco Trust when it alleges that “BOV, as custodian of the fund, acted negligently without the necessary skill and care, and in flagrant breach of its obligations it failed to supervise and monitor the funds’ compliance with the investment restrictions…”? You might answer no smoke without a fire and certainly the truth will be revealed when the report of the seven-month long investigation is published.
Surely MFSA as the regulator that monitors, on a regular basis, the many monthly compliance reports submitted by the Fund would have been aware that no set of “clean audited accounts” were presented by VFM to account for its Belgravia investments. For this reason, the judicial protest is quite scathing when it alleges that even Bank of Valletta, as custodian, failed to report this breach to the Malta Financial Services Authority. To complicate matters further, at an annual general meeting of the fund, BOV as a shareholder succeeded in blocking the publication of the MFSA investigative report. In their judicial protest, fund holders claim inter alia that BOV was motivated by self-interest qua custodian and qua shareholder/controller of Valletta Fund Management whose conduct is currently under review by the MFSA.
Certainly the officers of BOV have more than one hat to wear but who can blame them? So can a parallel be drawn with the successful claim by a number of aggrieved depositors in Barclays Bank to be awarded compensation? In fact the UK media shows how FSA ordered Barclays Bank to compensate thousands of depositors the sum of £60 million for giving them poor advice in two investment funds. Perhaps as an uninformed onlooker you might conclude that there exists no similarity between the two claims. On the other hand, one might reason that an equitable compensation will be a better solution for the bank’s reputation than a long drawn out court litigation. Otherwise, if a solution is protracted, the outcome of this saga can be compared to opening Pandora’s box when BOV replies to the investigative report compiled by the MFSA. Then the cat will be set among the pigeons.
Mr Mangion is a partner in PKFMALTA, an audit and business advisory firm.
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